The US Senate Special Committee on Aging heard testimony today regarding the benefits -- and potential drawbacks -- to reverse mortgage products available to seniors.
Reverse mortgages give senior homeowners access to the equity built up in their homes. The most common reverse mortgage product is guaranteed through the Federal Housing Administration, requires no monthly payment of the homeowner and instead makes equity available in the form of cash.
The mortgage becomes payable at the time of the homeowner's death, the sale of the home, or when the homeowner fails to make tax and insurance payments. The house itself pays back the mortgage, and usually the amount due at repayment is capped at the value of the house.
Seniors usually have a choice as to the method through which they receive the equity available to them. Sometimes they receive cash through installments and at other times it comes in the form of a lump sum.
It's the second option that puts vulnerable seniors at risk, says Ann Jaedicke, deputy comptroller for compliance policy at the Office of the Comptroller of the Currency. She expressed concern that reverse mortgages put large lump sums in the hands of consumers who then do not plan accordingly. Issues may arise when the borrower takes on debt without proper guidance from the lender on how to manage it. For instance, the borrower may not be aware of the need to commence property tax payments and potentially face foreclosure, Jaedicke says.
"Used correctly, these products can provide funding for home improvement projects or medical needs, or provide long-term financial security to consumers," she adds. "However, like many mortgage products, without proper underwriting and strong consumer protections in place, there is also the potential for their misuse."
And since the federal insurance program covers about 90% of the reverse mortgage market, fraud and imprudent lending potentially puts taxpayers -- not just seniors -- at risk, critics say.
Peter Bell, president of the National Reverse Mortgage Lenders Association (NRMLA)acknowledged there exist certain risks in the reverse mortgage lending process, and iterated the association's dedication to fair and ethical treatment of customers by trusted originators. To ensure this goal, however, takes originator training and borrower counseling, he says.
"What separates reverse mortgages from all other products is counseling," Bell says, according to prepared remarks. "In fact, I don’t think you could come up with any business in America in which every potential customer is referred to an independent third-party specialist, a counselor at a HUD-approved agency, to review the transaction under consideration and its implications before a decision is made to proceed."
"If this had been the case throughout the mortgage sector," he adds, "we would be in a very different economy today."
Although counseling is a significant consumer protection within the reverse mortgage system, according to Bell, funding for counseling has fallen short by no small margin: the cost of reverse mortgage counseling for the federally-insured program is estimated at $16m to $18m this year, while Congress has only provided $8m. Customers have had to make new payments to offset the disparity between government funding and required funds for the counseling program.
Even still, according to Bell, some agencies have discontinued offering reverse mortgages altogether. For the consumers that actually benefit from reverse mortgages, this poses a potentially problematic issue.
Sen. Claire McCaskill (D-Mo.) in a statement at the hearing today says that, although reverse mortgages are not immune to imprudent lending practices, the program has its potential financial benefits for senior homeowners if the products are marketed and offered under appropriate conditions. She expresses her concern regarding misleading marketing, predatory advertising practices and a patchwork of regulation in place to control the practice.
"[Seniors] are trusting and believe in the integrity and honesty of others who may not have their best interests at heart," McCaskill says, according to prepared remarks. "We have a responsibility to make sure vulnerable seniors are not preyed upon and we should not create mechanisms that allow this to happen."
Write toDiana Golobay.

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